Jailbreaking is simply the process of unlocking the core system of your device, to allow external non-Apple-approved applications to be installed. Once jailbreaked, you can perform tasks such as SSH, file transfer, theming, and more; tasks which are not enabled by Apple by default.
The process is pretty simple, you will need some fundamental tools such as:
- iTunes 9x
- USB/Firewire Cable
- .ipsw Software Update Package
- and an iPhone or an iPod
To jailbreak your iPhone, follow this guide: http://www.quickpwn.com/2009/08/jailbreak-iphone-301.html
To jailbreak your iPod Touch, follow this guide: http://www.ithinkdiff.com/jailbreak-ipod-touch-os-3-1-2-with-blackra1n/
Good luck, and welcome to the underground!